Geithner to EU Ministers: Speak as One

Treasury Secretary Timothy Geithner told EU finance ministers on Friday they should end loose talk about a euro zone break-up and work more closely with the European Central Bank to tackle the debt crisis.

Speaking after discussing with ministers the possibility of leveraging the euro zone's bailout fund to give it more clout to tackle the region's debt problems, Geithner said Europe would not see similar global financial coordination as there was in 2009, but that Washington would do what it could to help.

"What is very damaging (in Europe) from the outside is not the divisiveness about the broader debate, about strategy, but about the ongoing conflict between governments and the central bank, and you need both to work together to do what is essential to the resolution of any crisis," he said.

"Governments and central banks have to take out the catastrophic risks from markets ... (and avoid) loose talk about dismantling the institutions of the euro."

The ECB reluctantly agreed last month to buy the bonds of Italy and Spain after they came under market attack on the understanding the bloc's bailout fund, the European Financial Stability Facility, would soon take up the cudgels. Even that was too much for some in the ECB -- the top German official at the bank, Juergen Stark, announced his resignation last week.

Geithner said he had told euro zone finance ministers that they had the capacity to deal with the now nearly two-year-old crisis, but had to improve their coordination.

"We don't want to see Europe weakened by a prolonged crisis, better for us if Europe is stronger," he said. "We will continue to do as much as we can to help Europe manage these challenges."

Earlier, a senior euro zone official said Geithner had urged ministers to look at leveraging the 440 billion euro EFSF, to make it more effective at calming the sovereign and banking-system liquidity problems.

Geithner provided no details but Jean-Claude Juncker, the chairman of the Eurogroup countries, said euro zone governments would push ahead with approving decisions taken on July 21 to resolve the crisis, which include making the EFSF more flexible.

He said adjustment programs in Ireland and Portugal, which have both been bailed out, were on track and that Greece's renewed commitment to its program meant that a decision on its next disbursement would be taken in October.

Financial markets were largely stable with the spread between Italian 10-year bonds and benchmark German Bunds narrowing slightly. Stocks, buoyed by a decision on Thursday by the ECB and other major central banks to reintroduce three-month dollar liquidity, were up.

Analysts say the EFSF, set up in May 2010 and so far used to bail out Portugal and Ireland, must be increased in size to build market confidence that the debt crisis can be contained.

But Germany and others refuse to bolster the fund and most euro zone national parliaments have yet to ratify new powers agreed for the fund two months ago that would allow it to make precautionary loans to countries under attack and buy sovereign bonds to prop up struggling states.

"It is difficult for the euro zone to come up with anything concrete at this stage but they need to keep up the momentum," said Gavin Friend, market strategist at National Australia Bank.

"Geithner gets how important all of this is ... Markets understand it will all take time to work through but they want to hear that the discussions are making good progress, that the Europeans are receptive to what Geithner has to say."

In an unusual move, the European Banking Federation in Brussels issued a statement calling on the EU to make "clear commitments for stronger governance and budgetary discipline."

"We need a clear and united signal from finance ministers, central bankers and the ECB so that markets can regain confidence," it said.

COLLATERAL CONUNDRUM

With most economists saying a Greek default is inevitable at some point and the much larger Italian economy not out of the firing line despite parliament's approval of a new austerity package this week, the pressure is on to act.

A Reuters poll of more than 50 economists across Europe gave a 65 percent chance Greece would default with half of them saying it would do so in within 12 months.

Europe and the United States face 10 years of pain if a global solution for the euro zone debt crisis is not found soon, said former British prime minister Gordon Brown, an architect of the response to the world financial crisis of 2007-2009.

"Unless there is global coordination ... I foresee 10 years of low growth in Europe and America, I foresee very high levels of unemployment and I foresee a failure of coordination that will lead in the end to greater protectionism," Brown said at the World Economic Forum in Dalian.

German Chancellor Angela Merkel again expressed her adamant opposition to the issuance of common euro zone bonds, which Germany fears will raise its borrowing costs even if it helps reduce the costs for riskier states. Among the issues finance ministers will have to try to resolve on Friday is a row over the terms of a second bailout for Greece, with countries such as Finland demanding collateral in return for new loans -- a major obstacle to a deal.

"I think we are going to negotiate about it but unfortunately I don't see that we can find a solution tonight," Finnish finance Minister Jutta Urpilainen told reporters. "I'm optimistic that we can find a solution that everybody can accept."

Collateral is a must for Helsinki but officials say a solution is coming together whereby it is made so expensive to demand it that no country but Finland will take it.

Policymakers expect international lenders to be able to recommend by the end of the month releasing a vital next tranche of aid to Greece, warding off the threat of an imminent default.

While that may keep Greece afloat until it gets a second bailout package from the euro zone, its finance minister said the country would remain mired in recession through 2012, the fourth year in a row, a contraction that is only likely to fuel popular outrage at the austerity drive.

"The intention is to meet the fiscal targets for this year and next year without delay, without exception and deviations," Greek Finance Minister Evangelos Venizelos told reporters.